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Opinion: Bernard Hickey argues both potential governments should say how they'd deal with the 1 in 5 chance of global recession and budget blowout

Posted in Opinion Updated
See video

By Bernard Hickey

Just imagine if the worst happened and Dan Carter was forced out of the World Cup.

Graham Henry did just that and prepared three backup first fives. In the end, the All Blacks had to use their fourth back-up first five through most of the final. Stephen Donald played well, in part because he had played in pressure matches before and knew the calls after a couple of weeks in the squad. Henry and Richie McCaw both cited their contingency planning in the post-victory celebrations.

So where is our Stephen Donald for the economy?

Just imagine if the worst happened for the economy. What would our elected government do to deal with it? What is their plan for the worst case scenario?

The scale of that worst case scenario has now been spelt out in black and white in Treasury's Pre-Election Fiscal and Economic Update (PREFU). Treasury was very particular about highlighting the downside risk of a much deeper downturn in the global economy in its PREFU.

It took the trouble to forecast what would happen to the budget deficit track if the American and the European economies contracted 1.5-2% over the next year and Chinese economic growth slowed to 6% from 10%.

This would sharply reduce commodity prices and widen New Zealand's current account deficit to 7.9% of GDP by March 2016 from the 6.9% forecast in the main scenario. Nominal GDP would be a cumulative NZ$35 billion lower through the year to June 2016, meaning tax revenue would be a cumulative NZ$4.5 billion lower.

The budget would therefore remain in deficit right through until 2015/16, where it will still be in deficit to the tune of 0.5% of GDP. The main scenario is for the budget returning to surplus by 2014/15, little changed from Treasury's May forecast, even though the composition and track for the deficit is a little different. See Alex Tarrant's article here.

Net government debt would rise to 35% of GDP from 20% now and about 7% higher than the central track. Treasury said this scenario had a one in five chance of happening.

Finance Minister Bill English said National was committed to its target of getting into surplus by 2014/15 by controlling growth in government spending. However, he gave himself some wiggle room by saying the surplus was a target to be achieved, but "not all costs."

English also pointed out that the double downgrade on September 30 had yet to increase either government borrowing costs or the borrowing costs of households or businesses. He suggested that a significant downturn globally may see interest rates stay low or even go lower, which would reduce the fiscal and household pain of high debt.

He said there was a one in 20 or one in 30 chance of the type of financial market meltdown seen in the wake of the uncontrolled collapse of Lehman Brothers.

I asked English if both major parties should outline to the electorate what they would do in the event of a significant downturn (see video below).

He said the government was in a better position to handle such a downturn than it had been in 2008. The government would continue to protect the vulnerable while minimising the amount of extra borrowing.

But he stopped short of saying what response the government would take. He also said he didn't expect other parties to spell out their worst case policies.

Why we should know

The best way for the electorate to look at this issue of whether parties should detail their 'worst case' scenarios is to look at Treasury's PREFU from before the 2008 election.

These forecasts were finalised on August 28, 2008 and the PREFU was published on October 6, 2008. 

Just think back to what was happening at the time. Lehman Brothers filed for bankruptcy on September 15, 2008, in between the finalisation of the PREFU and its publication. Global trade slumped more than 30% in the ensuing 6 months. America slumped into a savage recession that many argue hasn't really ended. New Zealand's recession was extended until early 2010.

Back then Treasury was forecasting a deficit this year of NZ$2.4 billion. Instead we ended up with a deficit of NZ$18.4 billion, albeit including NZ$9.1 billion due to the Christchurch earthquakes.

Even Treasury says there are significant risks of a financial meltdown in Europe forcing both Europe and America back into recession. It also admits China may not be able to play the same supportive role it did in 2009 because of high inflation and growing bad debts.

As I write, European leaders are in crisis talks to try to prevent the meltdown of the European financial system. There is no guarantee they can avoid it, although Bill English seemed confident they could get through, albeit with a few hiccups, and that it would take a long time.

Back in the 2008 election campaign both major parties went through as if in a daze. Neither presented potential policies to deal with a protracted economic downturn or a financial meltdown. Both crossed their fingers, put on their best makeup and smiled and waved through to polling day.

So instead, we had policy made on the run during and after the election campaign. Labour was forced into a retail and wholesale deposit guarantee in the first week of the campaign that ultimately led to the bailouts of South Canterbury Finance and Equitable Mortgages.

Once elected, National suspended contributions to the NZ Superannuation Fund and introduced the big tax switch, including an unpromised GST increase and bigger income tax cuts. It also chose to borrow heavily rather than cut into middle class entitlements such as Working For Families and Interest Free Student Loans, although it did cut back on KiwiSaver subsidies.

None of these policies were previewed before the election.

The reason for PREFU

The whole point of the PREFU's introduction as part of the 1989 Public Finance Act was to ensure there were no surprises for the electorate after an election.

No new government should be able to say: 'We looked under the hood and found everything was different. Sorry, we'll have to reneg on our promises.'

Treasury went out of its way to include a four page section in the PREFU (pages 49-52) detailing the downside scenario.

Our major political parties should not ignore it.

Voters can't allow them to ignore it again.

Graham Henry didn't cross his fingers and hope that Dan Carter's abductor longus tendon would be OK. He prepared Colin Slade, Stephen Donald and Aaron Cruden for pressure games. All three had started against top tier opposition in pressure matches.

Have our potential governments prepared policies that would allow them to respond to the worst and ensure voters aren't surprised?

Voters must demand Labour and National detail what their 'Stephen Donald' policies are.

See Finance Minister Bill English answer below. Watch Labour Party finance spokesman David Cunliffe's response here.

(Updates with video of English, link to Cunliffe's response)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment in the box on the right or click on the "'Register" link at the bottom of the comments.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

16 Comments

"Voters must demand Labour

"Voters must demand Labour and National detail what their 'Stephen Donald' policies are"

I would say that, like Stephen Donald, the economy is headed for a Bath.

Oh dear, Bernard. Wash your

Oh dear, Bernard.

Wash your mouth out. How could you even think such events could occur?

;o))

4 million Kiwis consume too

4 million Kiwis consume too much and don’t plant enough – simple !

Bernard - looking into current developments on many fronts – the world will never recover again, simply because among the powerful in societies ethic and moral requirements and standards don’t prevail.

Growth propaganda by “Political Town Criers” like PM Key and others are irresponsible, even unethical and should be challenged.

There is only one planet: http://www.youtube.com/watch?v=EQqDS9wGsxQ

..and societies pay already high prices, just to repair what we destroy(ed).

 Recommended: http://aidontheedge.info/2011/01/11/the-globalisation-of-vulnerability/

 

 

Listening/ reading current

Listening/ reading current comments - I think the government just lost the plot !

Considering worldwide developments on many fronts with severe consequences for societies – what we need in this country is - urgently – unity !

1 in 5? 

1 in 5? 

The Golden Age is over.  He

The Golden Age is over.  He is too optomistic by far.  I give it 1/20 of not having a meltdown as bad as lehman, and 1/3 of having a meltdown far far worse.  Both parties will collectively bankrupt the country, and we will look back with longing on the Golden Age of the noughties.

If they cant run a surplus and grow the economy with the bigggest fonterra payout ever, how can they hope to achieve a surplus in the deflation of the biggest credit bubble in history.  Dreamers, look around, the past is over, people still want to live the great life that they were promised when they were kids.  It can't happen, unless you want to steal from the next generation, to fund a life of excess today. 

Three years ago they were forcasting the worst recession since the great depression.  We have merely put that off, well it's time to pay the piper.  This time it's different, we have more debt, a lower quality of life, you can't extend and pretend for ever.

Credit bubble, housing bubble, stock bubble, bond bubble, pop pop pop pop.  Planning for a worst case is a logical step, given all the bad news out there at the moment, I read roughly 30 financial headlines a day and 2-3 are good news spin. 

I have plan A, B, C, and D, and they cost nothing, it's a real investment for the future, building up a mountain of debt is reckless, irresponsible, and shows lack of sound judgment.  These dreamers only care about the next 3 years, then once theyre gone, they can go and work in the privates sector leveraging thier contacts in the coercive sector.

Fast track to plan D, sell

Fast track to plan D, sell what I have and don't need, clear debt, hoard cash, buy low what I need and don't have.  Take care of me and mine first and foremost.  Then join the revoloution.

Plans, plans, what a good

Plans, plans, what a good idea.

What would  you do in a country where the major city has ALL of its power supply come from or across, an active volcanic region, ALL of its gas supply from around the base of an active volcano, ALL of its major export dairy industry electrical supply from the same sources, so that in the case of a major volcanic event this major city has no power and the export sector closes down. Who weeeee.

The question is would you pay anybody in these power related sectors a tuppence. They have failed to protect the country and its exports. Period.

 

What is needed urgently is several combined power stations placed in mothballs and a years worth of coal in storage somewhere north of New Zeland's major city. Make it urgent by paying the heads of departments and companies half to a third of their salaries until it is done. Yes, we have to pay for it, we have NO choice.

 

We better be quick.

Updated with Bill English

Updated with Bill English video answering Bernard on this

Cheers

Alex

Answering?  More like

Answering?  More like responding, an answer would address the issue not avoid it.

What an arse, no plans for a

What an arse, no plans for a downside!  Ridiculous to have a high minister of finance like that.  Honestly not giving a stuff about paying any of this back.  WTF is wrong with the investors, I could never get a loan with an attitude like that.  The investors have confidence in the debt slaves, that they will bear the burden of an out of control, power hungry government.

Where the hell is Guy Fawkes? 

"He said the government was

"He said the government was in a better position to handle such a downturn than it had been in 2008..."

In my opinion... this sounds like either a blatant lie or ingnorance....  Almost embarassing...

How can he say that... 

Just take the Govt interest bill ..  It has gone from $2.2 billion in 2005 to a projected $4.5 Billion in 2014.....

If most of that borrowing has been offshore.... then that means our terms of trade would need to GROW by $2.3 Billion..  JUST TO service the interest payments.

( Our terms of trade are at record levels ..of about $1.2 billion ..at the moment )  ( but we still have a chronic current acct deficit of $7.4 biilion each yr )

All English can do , is Babble on about is 9 quarters of "growth". ... ( U can see why we need it.. like a drug )

Turns out...English and Key are just more of the same ..... when it comes to politicians....   

Ok... to be kind.... maybe they have to talk shit to make us feel good..????

The GFC marked a "paradigm shift"....  BUT not from our Govt... or Treasury. 

 

 

 

 

Bent over?  Otherwise how can

Bent over?  Otherwise how can our position be better, more debt, slower growth, a major earthquake just happened and we need to fix all that up before we can be in a better position.  There are no easy answers to this, they are tough calls to make, but none of our leaders have the balls to make them.